If you’ve been watching the stock market for the past few weeks, you might be at a point of concern. The stock market overall has seen some of the worst single-day drops in history, and thanks to COVID-19 (and a host of other complicating factors), investors are starting to buckle down and prepare for a bear market—or even a recession. Insider Monkey had been one step ahead of the markets and finance professionals. We published an article almost 4 weeks ago and told you that recession is imminent and you should short the market.
If you’ve only invested in stocks recently, or if stocks were a big part of your strategy, you might be concerned about the future. But don’t worry too much—conventional wisdom and historical data suggest the market will bounce back sooner or later.
In the meantime, and in the midst of a possible-if-not-probable economic downturn, there are some new strategies you can incorporate to balance out your efforts.
Preparing for a Recession
If you believe an economic recession or milder downturn is on the horizon, there are several new investment strategies to add to your lineup, including:
1. Keep some cash. First off, if you have extra cash, try to keep some on hand. Liquid cash isn’t going to earn you much of a return (if any), but it is going to be consistently available. If you’re not sure about the future of your job, or if you’re looking forward to uncertain buying opportunities in the future, there’s no harm in having extra cash on hand for when you need it. As for what amount to hold back? That depends on your outlook and level of risk tolerance.
2. Invest in real estate. Currently, real estate prices are remaining stable. If they drop, it could present an amazing buying opportunity; even in a recession, people are going to need somewhere to live. If you buy a low-cost property and entice renters with attractive first-month deals, you could establish a stream of income for yourself for the foreseeable future. Real estate investments are also a great way to balance out your portfolio, especially if you’ve been leaning too heavily into stocks in the past.
3. Pay attention to recession-friendly industries. Of course, stocks aren’t always a bad thing in a recession. In fact, some companies and industries do exceedingly well during times of economic hardship. For example, companies in the utilities sector are much less affected than companies in something like luxury goods. And some companies, like discount grocery stores and low-cost retail outlets, start generating more revenue when people’s budgets are stretched thin. Do your due diligence, and keep an eye out for promising buying opportunities.
4. Diversify with bonds. Stocks and bonds have a complex and somewhat inverse relationship. In case you aren’t familiar, bonds serve almost like loans to businesses and organizations; you’ll make an initial investment, then capitalize on a fixed percentage rate of return. They don’t tend to have attractive long-term yields, like stocks, but are a stable and low-risk option, even in troubling economic times. Consider a bond fund, which allows you to invest in a collection of bonds, to hedge your bets even further.
5. Consider trading options. If you strongly believe the stock market—or certain stocks—are going to decrease further, you could take advantage of that trend with the help of options. Options contracts give you the possibility of profiting from a prediction about the future price of a given asset. “Put” options speculate a future decline of price; if you guess right, you could make a substantial profit. Just be aware that trading options is more complicated and riskier than simple investments, and if you’re not careful, it could cost you.
6. Diversify your income. Even if you’re not concerned about the health of your job or career, this is a good opportunity to try and diversify your income. Consider picking up a part-time job, or utilizing passive income to supplement your full-time salary. It’s a way of guarding your revenue streams against volatility and uncertainty.
7. Invest in yourself. Finally, spend time and money investing in yourself. In uncertain times, one of the best things you can do is learn new skills, gain new knowledge, and seek new forms of experience. Sooner or later, these assets will pay off—increasing your future career options.
Avoiding Panic
One of the worst things you can do in the wake of a recession is panic. Too many investors sell off their assets prematurely, or hesitate to invest in cheap assets because they’re paralyzed with fear about the future. While it’s entirely rational to be aware of your risks and be cautious in a volatile market, panicking isn’t going to help you.
Stay calm, think logically about your options, and stick to your values as an investor—even in trying times.